Financial professionals are using May 29—National 529 Day—to highlight 529 plans and their benefits, at a time when many Americans are struggling with education costs.
“Used strategically, they can significantly reduce the need for student loans, yet awareness remains far too low, especially among middle-income families.”
Vestwell Founder and CEO Aaron Schumm
Only two in five adults (38%) believe they’re saving enough to reach their goal for future education expenses, according to a study from Edward Jones and Morning Consult. And more than 43 million Americans are already carrying student debt, according to the U.S. Government Accountability Office.
529 plans provide a tax-advantaged way to save and pay for education-related expenses. Yet most adults—52%—are unfamiliar with the plans and their benefits, and just 14% say they currently use or intend to use a 529 plan to save for education, according to the Edward Jones study.
“These tax-advantaged accounts are one of the smartest ways to save for K-12 tuition, college, and even apprenticeships,” said Aaron Schumm, founder and CEO of Vestwell. “Used strategically, they can significantly reduce the need for student loans, yet awareness remains far too low, especially among middle-income families.”
A 529 plan allows the plan owner to contribute after-tax dollars into an account and invest that money into equity, bond funds or a portfolio that grows less risky over time. The money can be withdrawn tax-free to pay for education expenses like tuition, fees, books and room and board.
Many adults don’t know that 529 funds can also be used to cover the cost of apprenticeship programs and, in many states, K-12 tuition. The Edward Jones study found 72% of Americans were unaware that apprenticeships are covered, and 65% didn’t know they could use the funds for K-12 tuition.
Contributions made to 529 plans can qualify for a state income tax benefit in some states, and any unused funds can be transferred to a Roth IRA.
“With new rules allowing unused 529 funds to be rolled over into a Roth IRA, families no longer have to worry about ‘over-saving,’” Schumm said. “The money can still support their child’s future, even if plans change.”
When informed of the tax benefits of a 529 plan, 57% of adults said those advantages made them more inclined to enroll in a 529 plan, according to the Edward Jones study. And one in five respondents (20%) said they would prefer contributions to a 529 plan for their child as a gift from loved ones.
“On 529 Day, let’s commit to making these tools easier to understand, more accessible and a more visible part of how we talk about financial health,” Schumm said. “Education savings isn’t a luxury, it’s a cornerstone of a secure future. Let’s make sure every family knows how to get started.”
Morningstar rates state 529s
Morningstar recently evaluated 59 different 529 plans representing more than 90% of the industry’s assets and awarded 32 of the plans with Gold, Silver or Bronze Morningstar Medalist Ratings. Those that earned medalist ratings were lauded for factors like low fees, a well-researched asset-allocation approach, an experienced investment team and stable state oversight.
Morningstar gave its highest rating—Gold Medalist—to five state plans: Alaska, Illinois, Massachusetts, Pennsylvania and Utah.
The report noted that these Gold-rated 529 plans offer exceptional state stewardship of investor capital and well-constructed portfolios managed by competent investment teams.
Fourteen plans earned Silver ratings, including advisor-sold plans offered by Ohio and Virginia. (Advisor-sold 529 plans tend to be more expensive and experience a higher hurdle for Medalist Ratings, the Morningstar report said.) Overall, 11 plans were upgraded, and nine were downgraded.
SEE ALSO:
• Americans Oblivious to 529 Plan Benefits
• 529 Plans Still Have an Identity Problem
• SECURE Act Allows 529 Plans to Repay (Some) Student Loan Debt
Corey Dahl is assistant editor with PropertyCasualty360.com. Previously, Corey was the editor of Colorado Builder magazine andS enior Manager of Content Strategy & Development at Charles Schwab.